Potential Changes In Index Sector Funds

Shifting to the impact on technology ETFs, the largest and fifth-largest industry groups for the Technology Select Sector SPDR (XLK) are software (19% of May assets) and internet software and services (14%). XLK’s holdings in these industries include Electronic Arts, Facebook and Google, all of which CFRA thinks could be impacted by the proposed GICS changes.

While some U.S.-focused sector ETFs have combined telecom with another sector, the iShares Global Telecom ETF (IXP) tracks a global S&P index of only telecom companies. AT&T and Verizon are in the top 10 holdings, along with Canadian telco BCE and European carriers Deutsche Telekom and Vodafone Group. In addition, Fidelity and Vanguard each offer MSCI-based U.S.-focused telecom ETFs.

CFRA thinks the potential creation of a communication services GICS sector, bringing together companies currently in three different sectors, would have a large impact on the sector ETF universe. The above and other passively managed funds simply aim to replicate an S&P or MSCI based index.

These index trackers do not have discretion the way actively managed funds do, such the MFS Technology Fund (MTCAX), which has an 11% weighting in consumer discretionary stocks. We will keep an eye on these developments and provide updates on what they mean for investors.

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him at @ToddCFRA.